From tech startups in Yaba to artisan workshops in Aba, Nigerian President Bola Tinubu’s proposal to create a National Credit Guarantee Scheme (NCGS) could be a turning point for an economy driven by It is oiled by its small businesses.
Limited access to credit has held back millions of small businesses in Nigeria, often allowing their enormous potential to go to waste.
Nigeria’s challenging business environment deters banks from lending to businesses without collateral, which many entrepreneurs cannot offer. Meanwhile, informal lenders, while not requiring collateral, impose exorbitant interest rates that stifle growth.
To address the financing gap for micro, small and medium enterprises (MSMEs), which the African Development Bank estimates at $160 billion, Tinubu announced the creation of an NCGC during his New Year address on January 1.
The NCGC would act as a guarantor, helping businesses and even individuals obtain loans from banks by providing them with the collateral they lack.
Economists at the International Finance Corporation (IFC) believe that closing even a fraction of the Nigerian MSME credit gap through a national credit guarantee system could unlock huge economic potential, create jobs, increase productivity and boost productivity. innovation.
What is a National Credit Guarantee System (SNCG)?
In essence, the National Credit Guarantee System acts as a cosigner for loans, providing partial guarantees to lenders in case borrowers default.
It is not a handout but a handshake, a signal to financial institutions that the government supports their MSMEs.
This model has proven its value in countries such as South Korea, Malaysia and Chile, where credit guarantees have transformed access to financing into an engine of economic growth.
In South Korea, the Korea Credit Guarantee Fund (KODIT) became the secret ingredient behind the rise of global giants like Samsung and LG. By guaranteeing loans to high-potential companies, he created an environment where ideas could flourish and risk was no longer a four-letter word. Similarly, Malaysia’s Credit Guarantee Corporation (CGC) has backed more than $20 billion in loans, boosting GDP and creating thousands of jobs.
The little-known history of Samsung
South Korea’s meteoric rise from a war-torn nation to a global economic power is one of the greatest success stories of modern times.
Today, the East Asian country is known for its cutting-edge technology, dynamic industries and multinational conglomerates, including Samsung and LG.
But behind this dazzling transformation lies a lesser-known hero: the Korea Credit Guarantee Fund (KODIT). This national financial institution played a pivotal role in shaping South Korea’s corporate giants and laying the foundation for its economic miracle.
Take Samsung as an example. Samsung, which means “three stars” in Korean, began in 1938 as a modest trading company dealing in dried fish, noodles and groceries.
Founder Lee Byung-chul envisioned a business that could adapt and evolve, and in the 1960s, Samsung ventured into textiles and insurance. But it was during the 1970s and 1980s, when South Korea launched its ambitious export-led industrialization campaign, that Samsung pivoted toward electronics, a move that would forever change its destiny.
In the early days of this transition, Samsung needed substantial financial backing to enter the high-risk, capital-intensive semiconductor market. KODIT stepped in, offering critical credit guarantees that de-risked bank loans and attracted additional private investment. This financial lifeline allowed Samsung to invest in research, facilities and talent during a period when the domestic banking sector was reluctant to support such bold ventures.
The bet paid off. Today, Samsung is a global leader in semiconductors, smartphones and consumer electronics, with annual revenues exceeding $200 billion.
“There are multiple benefits of a credit guarantee scheme for a country like Nigeria, where banks prefer to lend to less risky businesses rather than small businesses without a proven track record,” said Lagos-based small business owner Dennis Abariba.
“Imagine what my business could do with more capital that can be unlocked through a credit guarantee scheme?” Said Abariba, who sells used electronics and employs four people.
Also read: 2025: Tinubu considers National Credit Guarantee Company to expand access to finance
How the NCGC will work
The company, which is expected to begin operations before the end of the second quarter, is a partnership between government institutions such as the Bank of Industry, the Nigerian Consumer Credit Corporation, the Nigerian Sovereign Investment Agency and the Ministry of Finance Incorporated, the private sector. and multilateral institutions.
NCGC will not make loans directly. Instead, it will answer for MSMEs, ensuring that banks are confident enough to grant loans. With financial experts at the helm, the NCGC will evaluate businesses, confirm their eligibility for loans and issue guarantees. In exchange, businesses will pay a premium based on the size of their loan.
In a September 2024 proposal seeking the creation of the NCGC, the National Institute of Credit Administration (NICA), recommended initial government funding of between N1 trillion and N2 trillion, with the possibility of international support as it develops. the plan grows.
The NCGC plans to take on most of the risk in the event of default, offering a 100 percent loan guarantee to attract banks. Quick claims settlements will build confidence, while clear guidelines will outline when and how guarantees can be invoked.
“MSMEs are left out of the financial infrastructure of the economy and if we continue to do that, we will not be able to grow wealth and create jobs,” said Chris Onalo, professor of credit management and executive director of NICA.
“What we currently have are sector-focused credit plans, but we are now looking at a type of holistic plan that is extremely large in size, capital base and attractiveness to lenders,” Onalo said.
“Banks are under regulation, insisting that they cannot lend without collateral, but several MSMEs do not have reliable collateral, so a national credit guarantee corporation will be transformative as it was in countries like South Korea and China” , Onalo added.
NIRSAL and PBL Lessons
The challenges faced by sectoral lending initiatives, such as NIRSAL and the Anchor Borrower Scheme for agriculture, cast a shadow over the potential success of the Credit Guarantee Corporation, despite its focus on loan guarantees rather than direct disbursements.
The Nigerian Incentive-based Risk Management System for Agricultural Lending (NIRSAL) – a bold initiative designed to transform agricultural financing and unlock the sector’s potential – has grappled with loan defaults that have weakened credit confidence that it sought to generate in the banks.
More than 62 per cent of loans issued by NIRSAL Microfinance Bank and the Central Bank of Nigeria (CBN) under the COVID-19 Targeted Credit Facility (TCF) remained unpaid as at September 30, 2023.
The Anchor Borrower Program is another financing initiative aimed at farmers, but according to the International Monetary Fund (IMF), only 24 percent of loans disbursed under the scheme have been repaid. The Central Bank of Nigeria (CBN) says 52.39 percent of loans have been repaid.
To prevent the credit guarantee scheme from facing the same challenges as NIRSAL and the Anchor Borrower Programme, the government must establish a robust credit infrastructure, including streamlining the national identity database system, according to Basil Abia, an analyst at policies and co-founder of data analytics firm, Veriv Africa.
“The national identity database system shows 130 million registered Nigerians, but we still have a gap of 70 to 100 million Nigerians and we have to address it,” Abia said.
“There is also a need for a functional credit bureau ecosystem that includes public and private credit bureau companies so that there can be in-depth credit analysis. If the identity database is not optimized, it will be difficult to locate defaulters and we could end up with NIRSAL’s default rate,” Abia said.
Countries such as Japan and Germany have implemented digital platforms to track the utilization and repayment of secured loans, ensuring accountability and minimizing defaults. Nigeria could learn from these examples, integrating best practices to build a robust and reliable system.
Numbers speak louder than words
The correlation between access to credit and economic growth is not just a theory: it is a reality supported by concrete data. In Malaysia, MSMEs account for 38 percent of the gross domestic product (GDP) and 65 percent of employment, thanks in part to the CGC’s strategic interventions. South Korea’s KODIT has directly supported 1.2 million MSMEs since its inception, helping them become pillars of the economy.
MSMEs also form the backbone of the Nigerian economy, contributing almost 50 percent of GDP and accounting for 90 percent of employment, according to the National Bureau of Statistics (NBS), a feat they have achieved with limited access to credit and without the help of a national credit guarantee system.
Jobs, growth and more
The beauty of the National Credit Guarantee System is its multiplier effect. When SMEs prosper, they hire more workers, who in turn spend their wages back into the economy, creating a virtuous circle of growth.
For example, the establishment of a credit guarantee system in Chile led to the creation of 60,000 new jobs in five years.
In Nigeria, where youth unemployment is almost 50 percent, using the old NBS methodology, this could be a game-changer.
A carpenter in Abuja could hire more apprentices. A tech startup in Lagos could launch its first product. A fashion designer in Kano could expand her brand to international markets, all because she had access to the credit she needed.
In an effort to transition the economy from a cash-based system to a strong credit-driven culture, Tinubu also launched the Nigerian Consumer Credit Corporation eight months ago to improve access to credit for employed Nigerians.